Standard & Poor's warned in a report yesterday that it sees Ireland, Spain, Greece and Portugal "stuck in recession" which will complicate efforts to tame their deficits.

The rating agency forecast a "three-speed recovery" in Western European economies, with Germany and Finland growing the fastest. Irish bonds led declines yesterday among Europe's high-deficit nations following the report. Irish 10-year yields rose 19 basis points to 9.13pc at 4pm in London, widening the spread over bunds by 17 basis points to 5.92 percentage points. Greek and Spanish government bonds also declined after the Standard & Poor's (S&P) comments.

"This S&P headline isn't helping at all given that the general consensus is that Spain is actually doing quite well," said Michael Leister, an analyst at WestLB in Germany.

The ratings agency also cut Japan's long-term sovereign debt rating by one notch to AA minus yesterday. It is the first time it has cut the country's rating since 2002.

Japan and China now hold the same rating. The two countries have long been rivals for dominance in Asia. The latest rating action reflects investors' assessments that stable and democratic Japan is in decline, while the fast-growing Chinese dictatorship is becoming a better long-term investment bet.

S&P said Japan's inability to tackle its large government debt, a rapidly ageing population, as well as persistent deflation, all weighed on the rating.

The agency also cited a political shift that makes it harder for the Japanese government to implement reforms, after the government party lost control of the Japanese equivalent of the Seanad.

S&P raised its rating on China based on its modest indebtedness, strong external assets and exceptional growth prospects.

The yield, or interest, charged, on Japan's 10-year government bonds was little changed because the Japanese government borrows mainly from savers inside the country, who are slow to take their money elsewhere.

Japan is the most highly indebted rich country in the world. Its debt is set to be more than 200pc of GDP this year, compared to 113pc in Ireland, according to the OECD.